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India's Retail Sector Rings Up FDI Complexities

As emerging markets open up their economies for foreign direct investment (FDI), the retail sector is one that presents a conundrum for policy makers and politicians.
Typically it employs loads of people, has a low skills-barrier to entry and tends to be geographically dispersed. In India, for instance, the retail sector accounts for over 10% of the GDP and is the 2nd largest source of employment after agriculture.

No wonder then that elected officials are very hesitant in pursuing reforms that might burn them come election time. India recently witnessed a political firestorm where the government announced a liberalized regime for foreign investment into multi-brand retail, only to quickly back down a few days later.

There is no doubt that modernizing the retail sector has massive benefits for the country-at-large, including things like developing a more sophisticated supply chain, improving the transportation infrastructure and raising the standards of farm practices, among others. But if you are one of the small retailers that sell grocery and general merchandise, the prospect of a Walmart or Tesco opening their shiny stores down the street from you is likely to be traumatic. In such a case, what exactly can a small business owner do? The debate over whether or not to allow FDI typically ends up being framed in the context of heartless Goliaths (Walmart, Tesco etc) coming into poor markets and robbing the corner shop David of his modest livelihood. Not surprisingly, the reality is a lot more nuanced and the end-game not as easy to predict as one might think.

Studies indicate that when emerging markets have opened up their retail sectors, everyone has benefited, much like a rising tide lifting all boats. A recent study by Columbia University indicates that China, for example, permitted FDI in retail as early as 1992 and it has since attracted huge investments in the retail sector without affecting either small retailers or domestic retail chains. Employment in the retail and wholesale sectors increased from 28 million to 54 million from 1992 to 2001. And a similar situation happened in Indonesia where even after ten years of opening FDI in multi-brand retail, 90% of the business remains with small traders.” (Columbia FDI Perspectives, No. 52, December 5, 2011).

A Complex Picture Emerges

The retail market in India presents a complicated picture. One segment that wants retailers with predictable pricing, clean aisles and some semblance of customer service. And for these customers, the larger western giants like Walmart work really well. But there are millions of other folks for whom these shiny mega-bazaars do not work so well, for example:

Those who do not plan their shopping in advance since the larger store formats tend to be far away from town (to take advantage of cheaper real estate)

Those who like to run a monthly tab with their corner grocery store

Those who like free home-delivery service provided by the retailer even for very small order quantities

Those who buy on credit in the absence of a credit infrastructure (i.e. the retailer merely floats them a loan till payday, often without charging any interest).

If technology can be used to strengthen the hand of these shopkeepers, then millions of small entrepreneurs can rightfully carve their niche and thrive despite the invasion of the western and domestic chains. Carrefour, the French giant, despite its experience and resources is currently only running wholesale “Cash and Carry” stores in India which are only open to those customers who run legitimate businesses and cannot sell to end consumers themselves.

Estimates vary but the general consensus is that there are about 15 Million small retailers in India, otherwise known as the “kiryana” shops. Nearly 100% of these shops have access to mobile telephony and connection to a power grid, even though the latter is of questionable reliability. What they don’t have access to, are tools that can make them compete a lot more effectively in the face of a changing retail landscape. Since few of them will have access to a personal computer, the opportunity lies in being able to deliver services in the Cloud that can be accessed by a mobile device, whether it is a regular smartphone, a tablet device (the souped-up version of the $35 Akash tablet is only $50) or a traditional PC/laptop.

Given that micro retailers have traditionally thrived on a pure customer service element (selling cigarettes by the stick, individually), there seem to be 2 main areas where these small shops can be software-enabled to win:

In being able to better manage their inventory so that the amount of cash they have tied up in merchandise stock is limited

Being able to provide insight into things that larger retailers take for granted e.g. up-sell / cross-sell opportunities, customer order histories, holiday specials/coupons and perhaps getting a piece of the warranty pie for smaller appliances like toasters and water filters.

Nearly three decades ago, the average Indian consumer realized the awesome power of what automation could do for them when the Indian Railways computerized train ticketing system nationwide. Likewise, it is only a matter of time before organized retail is no longer a threat but a reality for most small retailers in India. The good news is that software vendors are realizing the potential of what the Cloud and Mobility can deliver to small businesses, and that can give the small merchants a real fighting chance, something they have not had in a long time.

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